Choosing a Self Employed Retirement Plan as a Real Estate Investor

Real estate investors who work independently or own their own business do not usually have a retirement plan set up. Most of them channel their spare cash into different investments and rely on their real estate to provide investment income. However, by forgoing a proper retirement plan, you can miss out on many tax benefits that a qualified retirement plan can offer. Therefore, it’s a good idea to look for a self employed retirement plan as part of a sound financial plan.

Next is the question of how to choose the right retirement plan for the self-employed. As a real estate investor, you want to find the options with the most benefits but without losing control over your retirement, right? Here are a few factors to take into account when you are looking for a retirement plan:

Self-directed option:

A regular business can set up a self-directed 401k but not without expensive set up and maintenance fee. For self-employed real estate investors, self-directed options are more affordably available with the self-directed IRA LLC and the Solo 401k plans available.

The key here is to find the true self-directed plan among different types of IRA and Solo 401k plans. Not all Solo 401k plans are self-directed. For example, a traditional bank may offer the Solo 401k plan, but restrict investment options to the stock indexes or mutual funds that the bank offers. Another example is a self-directed plan that allows investment in alternative packages including real estate assets, but the plan owners still have to request approval before adding any other investments.

Finding a truly self-directed self-employed retirement plan will give real estate investors the ability to use their expertise to grow their retirement fund. This means they should have the ability to choose almost any investment assets, and invest without getting approved by a custodian. This also presents some cost-saving benefits, as there will be no custodial fee or management cost.

Eligibility requirements:

Most self employed real estate investors choose a Solo 401k plan or a self-directed IRA LLC. One of the main differences between these two self employed retirement plans is the eligibility requirements.

To set up a self-directed IRA LLC, typically anyone can qualify. It doesn’t matter if you are already employed by another company or working entirely independently. This makes it one of the easiest plans to qualify for.

The Solo 401k plan can be a little bit more selective. This self employed retirement plan is designed for individuals; hence it is also called the Individual 401k. For the Solo 401k plan, you must have a self-employed business activity, either your own business or some contract-based work, full-time or part-time. Plus, you cannot have any other fulltime employee, who works more than 1000 hours for the business, besides you and your spouse.

Besides the eligibility requirements, the Solo 401k plan also comes with certain additional benefits compared to an IRA. For example, the Solo 401k plan allows borrowing from the plan while the IRA does not have any loan option. Also, while both plans can leverage real estate investments with a non-recourse loan, an IRA account will be taxed with Unrelated Business Income Tax, while the Solo 401k plan will not be taxed or penalized for using non-recourse financing.